Managing Finance

in a Digital World
Mind maps 04

Market Systems

BA1 - Microeconomic and Organisational Context of Business

BA1 – Mind Maps 04 - Tharindu Ameresekere
 Market Equilibrium Changes in Market Equilibrium

• Where Demand and Supply are matched Changes in either demand or supply cause changes in
• The price at which market equilibrium.

quantity demanded = quantity supplied

BA1 – Mind Maps 04 - Tharindu Ameresekere

 Market Failure Public Goods

Inability of a Market to
allocate resources in a Non-Rival Non-Excludability
way that maximises
utility is called a market
failure. Consumption of
the good by one Free Rider
person does not Concept
reduce the
available for
others.

BA1 – Mind Maps 04 - Tharindu Ameresekere

 Social costs or benefits that are not automatically included in the supply and demand
Externalities
curves for a product or service.

Merit Goods Merit goods are characterized by external

Positive Externality Negative Externality social benefits (i.e. positive externalities) in
consumption or by lack of knowledge of the
private benefits in consumption.
Benefit to society due
to a transaction. Cost to the society.
Government will Government will tax
provide subsidy them & control them. May be under • Ignorance of consumers of the
provided by the private benefits
market • Failure of market to reflect the
social benefits
• Excessive price, limiting access
to these services
De-merit Goods

Positive
Externalities A good or service which is
considered unhealthy,
degrading or otherwise
socially undesirable.

BA1 – Mind Maps 04 - Tharindu Ameresekere

 Government Price
Controls

Minimum Price Maximum Price

** Effective Minimum ** Effective
Price should be Maximum Price
greater than should be less than
equilibrium price equilibrium price

Causes of Causes of
imposing a imposing a
Minimum Price Maximum Price

Excess Supply Misallocation of resources Shortage of supply Misallocation of resources

Wastage of Resources Arbitrary ways of allocating a product

BA1 – Mind Maps 04 - Tharindu Ameresekere
 Economies of Scale Diseconomies of Scale

Reduction in unit average cost by Technical Dis-Economies of Scale

Increasing in unit average
increasing scale of production.
by increasing the scale of
Trading Dis-Economies of Scale
production in the long
run.
The existence of significant economies of scale Managerial Dis-Economies of Scale
can be expected to lead to:
i. Costs and therefore prices falling as firms
increase their scale of output To manage the cost of business better
ii. Barriers to entry for newer smaller firms; and the companies sometimes handover
Outsourcing
iii. Industries dominated by a small number of their work to outside parties. This is
large firms. called outsourcing

Transaction Costs

Cost of Searching Cost of Legal Agreements Cost of monitoring

BA1 – Mind Maps 04 - Tharindu Ameresekere